DOJ Argues that Small Tax Case Designations Can Only Be Removed for Exceeding the Jurisdictional Amount in Dispute Limit

We welcome back frequent guest blogger Carl Smith who writes about an interesting development regarding the government’s view of the effect of electing small case status in a Tax Court case. Keith

I write this post because I am sure that what the DOJ is arguing in the Tenth Circuit is, if accepted, going to be a shock to both the Tax Court and the IRS. I suspect that the latter has no idea that the DOJ is trying to take away a case management tool it has been using for almost 50 years. The DOJ is arguing that under section 7463(d), the sole circumstance in which the Tax Court may remove a small tax case designation is when it is belatedly discovered that the $50,000 amount in dispute limit for small tax cases has been exceeded. The DOJ argues that legislative history (relied on by the IRS and Tax Court over the years) that suggests other reasons for removing the small tax case designation (such as to create precedential rulings either in the Tax Court or the appellate courts) should be ignored, as the statute itself is clear.

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Section 7463 gives taxpayers the option (concurred in by the Tax Court pre-trial) to designate a case as a small tax case. The scope of the authority to remove the small tax case designation is one thing at issue in the Tenth Circuit in an appeal of Vu v. Commissioner, T.C. Summary Op. 2016-75 – a case on which Les previously blogged here.

In Vu, the taxpayer filed a pro se innocent spouse petition under section 6015(e) too early (though she had no reason to think so). The IRS filed an answer that did not allege any premature filing. By the time that the IRS moved to dismiss her case for lack of jurisdiction as prematurely filed, she could no longer correct her error by timely filing another petition. Judge Ashford stated that she had to dismiss the petition for lack of jurisdiction because the filing deadlines in section 6015(e) are jurisdictional. Though, as she did so, Judge Ashford herself wrote that “this is an inequitable result”.

At that point, Keith and I stepped in to represent Ms. Vu pro bono and moved for reconsideration, to vacate, and to remove the small tax case designation.

In the motions for reconsideration and to vacate, we argued that (1) under current Supreme Court case law, the filing deadlines are not jurisdictional and (2) the IRS waited too long to raise – and so forfeited – what is really a non-jurisdictional statute of limitations defense. At the time we made those arguments, the Tax Court in Pollock v. Commissioner, 132 T.C. 21 (2009), had held the 90-day filing deadline in section 6015(e) to be jurisdictional – based, in part, on Supreme Court case law up to 2009. But, no court of appeals had ruled one way or the other on whether the filing deadlines in section 6015(e) are jurisdictional.

In our motion to remove the small tax case designation, we pointed out the novelty of the jurisdictional issue in the appellate courts, that Ms. Vu’s case (if the designation were removed) could be appealed to the Tenth Circuit, and that the issue of whether the section 6015(e) 90-day filing deadline is jurisdictional was presented in two then-pending Circuit courts in appeals that Keith and I had also brought.

In the same order (on which Patrick Thomas blogged here in a designated order post), Judge Ashford also denied Ms. Vu’s motion to remove the small tax case designation. Judge Ashford noted that the amount in dispute in the case did not exceed $50,000. She also thought there was now enough precedent on the jurisdictional issue adverse to Ms. Vu so as not to justify removing the designation so that Ms. Vu could attempt to create Tenth Circuit precedent. The Judge also felt that, while technically timely (since the motion was made before the decision was final or any trial began), granting a motion to remove the small tax case designation after the judge had already issued an opinion “violates the spirit of the Court’s small tax case rules”.

Section 7463(b) states, in part: “A decision entered in any case in which the proceedings are conducted under this section shall not be reviewed . . . .”

Section 7463(d) states, in relevant part:

At any time before a decision entered in a case in which the proceedings are conducted under this section becomes final, the taxpayer or the Secretary may request that further proceedings under this section in such case be discontinued. The Tax Court, or the division thereof hearing such case, may, if it finds that (1) there are reasonable grounds for believing that the amount of the deficiency placed in dispute, or the amount of an overpayment, exceeds the applicable jurisdictional amount described in subsection (a), and (2) the amount of such excess is large enough to justify granting such request, discontinue further proceedings in such case under this section.

Legislative history states:

In view of the proposed increase in the small tax case jurisdictional amount to $5,000 it is contemplated that, the Tax Court will give careful consideration to a request by the Commissioner of Internal Revenue to remove a case from the small tax case procedures when the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case. . . . [R]emoval of the case from the small tax case category may be appropriate where a decision in the case will provide a precedent for the disposition of a substantial number of other cases or where an appellate court decision is needed on a significant issue.

Rept. 95-1800 at 277-278.

Relying on this legislative history, the Tax Court, over the years, has taken the position (with which the IRS agreed) that it had the power to remove small tax case designations for pretty much any reason (if the taxpayer asked) and for the reasons stated in the legislative history (if the IRS asked or the court acted sua sponte). See, e.g., IRS Chief Counsel Memorandum 200115033, 2001 IRS CCA LEXIS 13 (Feb. 14, 2001) (“While the small tax case designation turns chiefly on the amount in dispute, the government has succeeded in having the small tax case designation removed in cases where a decision in the case will provide a precedent for the disposition of a substantial number of other cases or where an appellate court decision is needed on a significant issue.”) The Tax Court views the second sentence of section 7463(d) as providing merely an illustration of one of the grounds for removing small tax case designations, not the exclusive reason.

Despite our setback in not getting the Tax Court to remove the small tax case designation – which would have made an appeal easier – Keith and I appealed the Vu case to the Tenth Circuit (Docket No. 17-9007). That Circuit suspended briefing in the case and requested the parties to discuss its appellate jurisdiction in light of section 7463(b)’s prohibition on appeals from small tax cases.

On November 15, 2017, Keith and I filed a response to the Tenth Circuit arguing two grounds for appellate jurisdiction:

First, we contend that section 7463(b) does not preclude appellate review of certain procedural rulings of the Tax Court in small tax cases. This is a novel argument under section 7463(b). However, section 7429(f) precludes appellate review of district court or Tax Court determinations made in section 7429 jeopardy assessment proceedings, and the majority of courts of appeals to have considered the issue has held that review of section 7429 procedural rulings is not barred by the statute. See, e.g., Wapnick v. United States, 112 F.3d 74 (2d Cir. 1997) (“Following other circuits, we hold that this limitation applies only to decisions on the merits regarding the jeopardy assessment in question. A dismissal of a Section 7429 proceeding for lack of subject matter jurisdiction is, therefore, appealable.”; citations omitted). Keith and I argue that the limitation of appeal in small tax cases should similarly not preclude review of the Tax Court’s (in our view erroneous) dismissal of a small tax case for lack of jurisdiction.

Second, we take the position that a denial of a motion to remove a small tax case designation is itself appealable (also a novel issue on which there is no case law). We argue (1) that Judge Ashford abused her discretion in denying a taxpayer request that was technically timely, and (2) that the statute’s authorization of removal before a decision in a small tax case becomes final shows that Congress intended to have the Tax Court sometimes remove small tax case designations after the court had already ruled on an issue. Relying on the legislative history of section 7463(d) and long-standing Tax Court practice, we argue that Judge Ashford was wrong to deny Ms. Vu a chance to create Tenth Circuit precedent on a significant, novel legal issue in that Circuit.

In a response filed on November 30, 2017, the DOJ distinguished section 7429(f) precedent on the ground that the statute there precludes the review of “determination[s]”, not “decision[s]” (as in section 7463(b)). Most shockingly, though, the DOJ, while conceding that Ms. Vu timely filed her motion to remove the small tax designation, argues that section 7463(d) only allows the Tax Court to remove a small tax case designation where the court finds that the $50,000 jurisdictional amount in dispute limit is exceeded. The DOJ contends that the statute’s language plainly shows this, so the legislative history laying out other grounds for removing the small tax case designation should be disregarded.

On December 7, 2017, Keith and I filed a reply that showed the Tenth Circuit the long history of the Tax Court making determinations on motions to remove small tax case designations using the criteria set out in the legislative history (such as to create appellate precedent) – not just looking at whether the jurisdictional limit has been exceeded.

Observations

As a litigant in the Vu case, I don’t feel comfortable saying anything more than this: Whether the DOJ is right on the removal power’s scope, I am pretty certain that the DOJ did not consult with the IRS before making the argument that the only ground on which the Tax Court can remove a small tax case designation is that the jurisdictional limit has been exceeded. Indeed, it is ironic that Ms. Vu’s case is an innocent spouse case where an argument is untimely filing. It wasn’t too many years ago that the Tax Court in Lantz v. Commissioner, 132 T.C. 131 (2009), invalidated a 2-year limitation on requesting section 6015(f) equitable innocent spouse relief that was set out only in a regulation. In order to challenge this ruling in many Circuits, the IRS sought to remove small tax case designations in a number of pending Tax Court cases so that the IRS could create precedent in many Circuits (and hopefully generate a Circuit split). See Iljazi v. Commissioner, T.C. Summary Op. 2010-59 at p. *4 n.1, where I was counsel for the taxpayer and where Judge Panuthos denied the IRS motion – basically on the theory that taxpayer preferences to stay as small tax cases should generally be honored.

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Speaking of small tax cases, Lawrence Ebert is back in Tax Court, surfacing today in an order removing the Small Tax designation from his latest dispute with IRS.

Readers will remember Mr. Ebert from the January 2015 post here concerning his victory in convincing Judge Colvin that he really did not receive $1,410 in dividends from BNSF in 2009, despite the issuance of Forms 1099-DIV to the contrary.

“Once again, a 30-second search of the missingmoney.com website would find that Mr. Lawrence B. Ebert of Bridgewater NJ has nearly 40 items of unclaimed property being held for him by the New Jersey state treasurer. No doubt the BNSF checks are among them. His failure to follow up every three months when the expected funds did not arrive does not excuse his failure to report them as income in the year they were available to him.

“A knowledge of unclaimed property law, often administered by the state revenue department, is much more useful than expertise in many of the topics taught in law schools. Big and small companies are subject to state audit to make sure property is turned over as required. When states do not find the owners, the money helps fund state budgets.

“Had IRS counsel not been ignorant of how to search for Mr. Ebert’s dividends, this case could have been settled quickly and to the satisfaction of all parties. Had Judge Colvin not been ignorant of how things work in the real world, this case would not have been decided incorrectly.”

“Kamman’s comments reflect a certainty naïveté about how New Jersey unclaimed property operates. I tried to get an itemization; not happening. Also, try to get a response from ComputerShare or Wells Fargo. The phone number on the document of Chief Counsel from ComputerShare was “not in service” and the signatory of the document could not be located.”

And six months later, Mr. Ebert added:

“As a headsup for Mr. Kamman, I received today (2 Sept. 2015) a phone call from NJ Property that they do NOT hold dividend checks from Burlington Northern for the year 2009. I am waiting to hear from ComputerShare, and the (fictional?) Mr. Baptiste, whose letter was used in my case.”

“This case is calendared for trial at the Court’s trial session scheduled to begin on February 5, 2018, in New York, New York. On November 15, 2017, respondent filed a motion to remove small tax case designation. On December 5, 2017, petitioner filed a response indicating that at the time he filed the petition he might have misunderstood the meaning ofthe word “deficiency”. Indeed, petitioner stated that he “believed that the word ‘deficiency’ corresponded to the net amount of tax owed.”

“The petition in this case was filed on April 7, 2017. On the petition petitioner marked the box to elect to have this case conducted under small tax case procedures and appears to place the full amount of the deficiency in dispute. The notice of deficiency attached to the petition determined a deficiency of $68,533 for the 2014 taxable year. It further states that petitioner had income tax withheld of $43,598 and made estimated tax payments of $5,612. The notice concludes that the “net tax due” is $19,323.

“Pursuant to section 7463(a), if the amount of the deficiency placed in dispute for a particular tax year does not exceed $50,000, proceedings in the case may be conducted “in accordance with such rules of evidence, practice, and procedure as the Tax Court may prescribe.” We have exercised that grant of statutory authority by promulgating Rules 170 through 174, which set forth special procedures for trying and resolving cases. Cases governed by these rules are generally referred to as “small tax cases”

“‘Deficiency’ is a term of art defined in section 6211. See Voigt v. Commissioner, T.C. Memo. 2004-62. Generally speaking and as relevant herein, a deficiency is the amount by which the “tax imposed” under the law exceeds the amount of tax shown on the return. See sec. 6211(a). A deficiency is determined without regard to the amount of taxes withheld on a taxpayer’s income or payment of estimated taxes. See sec. 6211(a), (b)(1); Keefe v. Commissioner, 15 T.C. 947, 955-956 (1950).

“In the notice of deficiency, a copy ofwhich is attached to petitioner’s petition, respondent determined a deficiency in petitioner’s Federal income tax for tax year 2014 in the amount of $68,533. It appears that the entire amount of this deficiency is in dispute. Accordingly, pursuant to section 7463(a) and Rule 170 this case is ineligible to be conducted under the small tax case procedures.”

“Accordingly, it is

“ORDERED: That respondent’s motion to remove small tax case designation filed November 15, 2017, is granted. It is further

“ORDERED: That the Clerk ofthe Court shall delete the letter “S” from the docket number and other records ofthe Court in this case.”

So today I checked the New Jersey unclaimed property holdings for Mr. Ebert on Garretson Road in Bridgewater, New Jersey, and found 44 items listed. There is a procedure for filing a written claim for these items, or submitting one electronically. There is no indication that more information can be found with a phone call, as Mr. Ebert described in his March 2015 comment. And the funds would have been sent to the state by ComputerShare, not BNSF.

The current case involves Mr. Ebert’s 2014 return. The BNSF stock would not be at issue because that company was purchased in 2009. There may have been some other stock that was sold, unbeknownst to him, with the proceeds going unclaimed. More likely, considering the amount of tax withheld and unclaimed on the return, he received a 1099-R distribution.

Bridgewater, N.J., is about 90 minutes from Villanova University, where some of the best tax lawyers in the country are found. Mr. Ebert may not qualify for low-income tax clinic assistance, but perhaps someone can help in return for a percentage of the unclaimed funds that New Jersey holds for him.

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Leslie Book

Keith Fogg

T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…

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